Earlier today I had the wonderful opportunity to guest lecture at Scott Curran‘s  Lawyers as Social Innovators class at Chicago-Kent College of Law at the Illinois Institute of Technology. Here are my notes for the class:

If you want to do good, your best bet will be to work with, or for, a nonprofit.

That’s a statement I know will elicit some strong challenges, particularly in this class. And times have changed since I was in law school. Certainly, much good (and bad) can be accomplished in any sector. But I’ll try to justify some continued truths about my statement.

To start, there are some important things to know about the nonprofit sector:

• It’s big – nearly 2M organizations that generate almost 5.5% of GDP (comparatively, retail generates about 6%); 9.2% of all wages and salaries (not including 8.7B volunteer-hours worth about $179B)
• It’s pervasive – religious institutions, hospitals and health care systems, schools, after-school programs, bar associations, homeowners associations, the Academy of Motion Picture Arts & Sciences, until very recently the NFL.
• It’s mostly, but not only, charitable organizations – there are also social welfare organizations, unions and labor organizations, trade and professional associations, social clubs, homeowners’ associations, and more

Why is working with, or for, a nonprofit important?

• Nonprofits produce public goods that the government and marketplace either fail to produce or fail to produce in a manner that makes them trustworthy to a significant segment of the public (e.g., religious services, healthcare, social services, education, educational media like PBS and NPR, museums and zoos, arts, affordable housing, disaster relief, workers’ rights, promotion of specific lines of business)
• Nonprofits have been the principal driving force of big social changes – civil rights, women’s rights, children’s rights, LGBTQ rights, environmental protection, animal rights, reductions in poverty/hunger in certain areas
• Nonprofits continue to be the most trusted of sectors in part because of the laws that –
  • dedicate charitable assets to charitable purposes,
  • penalize certain transactions benefiting insiders (like directors),
  • prohibit excessive compensation, and,
  • for 501(c)(3) organizations, prohibit political campaign intervention (though that may be subject to change)

So what is nonprofit law?

• Nonprofit corporate law – formation, governance provisions, corporate actions, board actions, membership actions, creation of subsidiaries, mergers, dissolution
• Tax law related to tax-exempt status – purposes, operations, lobbying, political campaign intervention, grantmaking, investments, taxes, joint ventures with for-profits
• Charitable trust laws – restrictions on use of charitable assets, registration requirements, fundraising regulations

What do you do as a nonprofit lawyer?

We create nonprofits; help structure their governance models; guide their operations (including when they want to engage in new activities like criticizing a governmental leader, supporting international efforts, running a new business, or partnering with a for-profit); structure corporate transactions like mergers and partnerships; provide opinions on planned transactions; draft and review contracts; and advise boards and management. We also regularly speak and write on nonprofit legal issues, advocate for the sector, and continually try to learn, not only the laws, which are definitely not static, but also the needs and challenges of nonprofits as their internal and external environments rapidly evolve. See also Attorney for Nonprofits.

Here are a few substantial parts of our practice:

• Formations – IRC 501(c)(3):
  • Exempt purpose (e.g., charitable, educational, religious, scientific)
    • Production of a film?
    • Restaurant that gives away 10% of profits?
  • Organizational test
  • Operational test
    • Shortsighted criticisms based on overhead ratios; commensurate test
    • Commerciality doctrine (case study: newspaper)
  • Charitable class
  • No private benefit
    • Scholarships to attend related for-profit school?
    • Providing open-source software to the public?
    • Naming a building after your donor?
  • No private inurement
  • No excessive compensation (e.g., excess benefit transactions)
    • Executive compensation
    • Payment to related for-profits
  • Public charity vs. private foundation
  • No substantial lobbying / no lobbying (PF)
  • No political campaign intervention (But Johnson Amendment repeal?)
• Mergers
  • Merger or dissolution and transfer
  • Successor to assets, liabilities, obligations (but some assets may not transfer)
  • Negotiations re: control (board, officers), employees, continuing programs, name
  • Due diligence, contract, filings
• Advocacy
  • What’s okay? (e.g., nonprofit advocacy is more than lobbying, advocacy an essential board responsibility)
  • What’s okay up to a limit, and what are those limits? (e.g., lobbying and the value of  making the 501(h) election)
  • What’s not okay?
• Mission-Related Investments (MRIs)
  • Prudent investment rules and exceptions including investments to further charitable purposes
  • Private Foundations: Program-Related Investments or PRIs (primary purpose = exempt purpose; no significant purpose is the production of income or appreciation of capital; not for lobbying/electioneering)
  • Endowment Rules (UPMIFA)
• Earned income
  • Taxable? Unrelated business income tax? What is a related and an unrelated trade or business?
  • Uses of a subsidiary
• Partnering with a for-profit
  • Commercial coventures – any person or firm who for profit regularly conducts a charitable sales promotion or underwrites, arranges or sponsors a sale, performance or event of any kind which is advertised to benefit a charitable organization.
  • Joint ventures with for-profits – (1) the operation of the joint venture must be consistent with the charity’s operation primarily for exempt (e.g., charitable and educational) purposes; and (2) the operation of the joint venture must not result in any prohibited private benefit.  50% control of board (veto power) on whole joint ventures; protections in governing/operating documents if less than 50% control (veto power) for ancillary joint ventures.

Trends and Thoughts

• Blurring between sectors – nonprofit and for-profit (philanthrocapitalism; hybrid organizations); nonprofit and government
• Collaborations across sectors
• Blurring between organizations (movements like Black Lives Matter)
• Reactionary legislation and regulation – reacting to highly publicized scandals and/or to limited budgets (1023-EZ; property taxes and PILOTs)